The NSA Scandal Will Cost US Tech Companies Tens of Billions

Editor-In-Chief

August 12, 2013 // 10:40 AM EST

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The NSA's National Security Operations Center, photographed in 2012. Via the NSA

Whether it's tech companies' fault or not—it's hard to fight against secret court orders, although some folks are—the PRISM scandal and related surveillance programs have dissolved any trust consumers could have in the privacy of US-based servers. That lack of faith comes with a cost: According to a new report from the the Information Technology and Innovation Foundation (ITIF), the US could end up losing out on tens of billions of dollars in the cloud-based computing space.

The cloud computing space has been growing steadily in past years, and is projected to boom even further in the next few, as shown by the ITIF graph at right. The United States, serviced by giants like Google and Amazon, has until now spent more money on cloud computing than the rest of the world combined, but that gap has closed considerably, with Western European markets expected to grow heavily in the next few years.

Current and projected growth in spending on cloud computing, in billions
of US dollars. Via the ITIF report

While Europe in particular has been open about trying to spur local cloud efforts, American firms still had a great opportunity to dive into a budding market. But with the US's great cloud computing secret now out in the open—American servers can be tapped whenever, in secret, with secret court orders—those firms are going to have a much more difficult time competing with upstarts like Iceland, where strict privacy laws have fostered growth in cloud computing and hosting services.

That the US's intrusions into data would have chilling effects on the data economy is no surprise. "It is often American providers that will miss out, because they are often the leaders in cloud services," Neelie Kroes, European commissioner for digital affairs, told the Guardian in July. "If European cloud customers cannot trust the United States government, then maybe they won't trust US cloud providers either. If I am right, there are multibillion-euro consequences for American companies. If I were an American cloud provider, I would be quite frustrated with my government right now."

But, as the report notes, US cloud services are taking a double hit here: Not only do they need to fight to retain their current customers, they also need to convince new customers in the rapidly-growing space that they're worth doing business with. From the report:

The impact of PRISM on U.S companies may be particularly acute because cloud computing is a rapidly growing industry. ... Global spending on cloud computing is expected to grow by as much as 100 percent between 2012 and 2016, whereas the global IT market will only grow by 3 percent. If U.S. companies lose market share in the short term, this will have long-term implications on their competitive advantage in this new industry.

Based on its market analysis, the ITIF pegs the potential loss to US cloud companies over the next three years at between $21.5 billion and $35 billion. (These are report estimates based on a projected market share loss that's magnified as the global market grows.) And beyond those years, US companies' lost market share will continue to be a disadvantage.

As we've seen with the shutdown of two commercial email enterprises last week—with Kim Dotcom ready to fill in the hole with a new email service to be based in countries with more privacy protections—the economic blowback of PRISM has already started. But the shutdown of Lavabit and Silent Circle's email service are, economically speaking, small potatoes to the losses the industry as a whole is projected to see.